# Question: Suppose Target s stock has an expected return of 20 and

Suppose Target’s stock has an expected return of 20% and a volatility of 40%, Hershey’s stock has an expected return of 12% and a volatility of 30%, and these two stocks are uncorrelated.

a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 16% and a volatility of 30%. Suppose this new stock is uncorrelated with Target’s and Hershey’s stock.

b. Is holding this stock alone attractive compared to holding the portfolio in (a)?

c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio?

Explain.

a. What is the expected return and volatility of an equally weighted portfolio of the two stocks? Consider a new stock with an expected return of 16% and a volatility of 30%. Suppose this new stock is uncorrelated with Target’s and Hershey’s stock.

b. Is holding this stock alone attractive compared to holding the portfolio in (a)?

c. Can you improve upon your portfolio in (a) by adding this new stock to your portfolio?

Explain.

## Answer to relevant Questions

You expect HGH stock to have a 20% return next year and a 30% volatility. You have $25,000 to invest, but plan to invest a total of $50,000 in HGH, raising the additional $25,000 by shorting either KBH or LWI stock. Both KBH ...Returning to Problem 38, assume you follow your broker’s advice and put 50% of your money in the venture fund.a. What is the Sharpe ratio of the Tanglewood Fund?b. What is the Sharpe ratio of your new portfolio?c. What is ...In mid-2009, Rite Aid had CCC-rated, 6-year bonds outstanding with a yield to maturity of 17.3%. At the time, similar maturity Treasuries had a yield of 3%. Suppose the market risk premium is 5% and you believe Rite Aid’s ...Unida Systems has 40 million shares outstanding trading for $10 per share. In addition, Unida has $100 million in outstanding debt. Suppose Unida’s equity cost of capital is 15%, its debt cost of capital is 8%, and the ...You are currently considering an investment in a project in the energy sector. The investment has the same riskiness as Exxon Mobil stock (ticker: XOM). Using the data in Table 13.1 and the table above, calculate the cost of ...Post your question